Add Avenue Supermarts Ltd : Strong revival and higher long‐term growth assumptions to help support valuations, Maintain ADD - Yes Securities
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Add Avenue Supermarts Ltd For Target Rs 5,530
Strong revival and higher long‐term growth assumptions to help support valuations, Maintain ADD
Our view
The recovery momentum witnessed towards the end of Q1 has picked up further pace displaying the resilience of the company’s value retailing business model and its ability to compete with online retailers.
While valuations have become more expensive post recent run‐up and can be a near‐term risk in case of a market correction, we continue to believe that DMART is well‐placed to capture long‐term growth opportunity for grocery retail given its scalable model and low‐cost structure which should enable a growth rate of 25% plus for the next decade. Its strong balance sheet, aggressive store expansion, cash generation and solid SSGs boosted by DMart Ready should be key growth enablers.
Result Highlights
* Result summary – Strong performance on both revenue and margins front led by strong momentum in footfalls and higher discretionary sales. Revenue grew ~47% yoy (29% above 2QFY20) helped by 8 new store openings in 2Q. DMart registered 23.7% SSSG in Sep 2022 vs Sep 2021.
* Margins ‐ Gross margin improved 30bps/190bps YoY/QoQ aided by recovery in higher margin general merchandise sales which resulted in EBITDA margin improvement of 260bps/440bps YoY/QoQ helped further by continuation of strong cost controls.
* Our calculated revenue/sqft and EBITDA/sqft was up by 24%/75% YoY. Positive margin surprise led to strong earnings performance with robust 113% PAT growth.
* E-commerce business saw revenue growth of 58.6% YoY to Rs 1.4bn with EBITDA loss of Rs15.6mn vs profit of Rs51.1mn YoY. DMart Ready was launched in Surat and Vadodara during the quarter.
Valuation
We believe the company should register positive SSSG in Q3FY22 led by robust demand in the ongoing festive season. We model in revenue/PAT CAGR of 37%/48% over FY21-24E, the highest growth in the large cap consumption space and maintain an ADD rating with a PT of Rs 5,530 based on 65x FY24E EV/EBITDA, implying 100x FY24 P/E. Key risk would be any disruption due to third wave of Covid-19 pandemic.
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